Based in the Woodlands, Texas in the United States of America, Conn's, Inc. (NASDAQ:CONN) is a leading specialty retailer of branded durable consumer goods. The company also provides credit solutions for its core credit constrained customers. The company has been losing market confidence since the beginning of the year and the stock witnessed a decline of nearly 55% year to date.
Source: Morning Star
In this article, I will discuss the reasons behind the market's lost confidence. I will also shed light on a few industry prospects that still make me optimistic about the stock.
Growing Revenue but Disappointing Cash flows
Conn's operates two business segments: retail and credit. The credit segment is the company's major segment and contributed nearly 92% to the total revenues in fiscal year 2014.
Source: CONN SEC Filing Form 10K
The credit business provides short-term and medium-term financing to customers. This financing program also offers credit to customers with lower credit scores thus increasing the chances of bad debts. The major reason the market has lost confidence in the company is its excessive credit sales to less credit worthy customers that severely deteriorated its cash position over the past few years.
Though the total revenue witnessed an increase of nearly 6% over the past five years, the company's cash position seems to be weakening as it has not been able to convert its revenue into cash flows. The total accounts receivable has increased from $736 million to about $1,068 million reflecting an annual rise of about 8% in the past 5 years. Presently, its receivable turnover ratio of 2.69 is much lower than the industry's ratio of 29.24. The total cash flow from the operating activities [CFO] has decreased from $64 million in 2012 to negative $210 million in 2014. The free cash flow [FCF] has also declined from $60 million to negative $158 million during the period under discussion. Moreover, the provision for bad debts has significantly increased from $49 million in 2010 to $96 million in 2014. The provision for bad debts as a percentage of average outstanding balance has also surged from 6.5% to 11% during the same period.
In my opinion, the downfall is temporary and the company is an attractive investment in the long term. The industry prospects look quite promising and will not only help Conn's to boost its top line but would also help the company recover from the cash flow crises.
Rising Income Levels
I believe Conn's will soon be able to convert its receivables into cash since the financial condition of the U.S. consumers is rapidly improving. The consumer confidence in the U.S. is rapidly increasing and jumped from 89 in September 2014 to 94.5 in October 2014. The rebounding economic conditions of the United States and falling unemployment levels have made Americans more confident about their incomes. According to the U.S. Bureau of Labor Statistics, nonfarm payroll employment surged by nearly 321,000 in November 2014 -- the U.S unemployment rate has declined from 6.2% in July to 5.8% in November. Increased employment levels have lifted the disposable incomes of U.S. consumers resulting in increased spending levels.
Presently, there are more than 6.1 million jobs in the United States. Increased employment levels have raised the disposable incomes of U.S. consumers resulting in increased spending levels. According to FRED, the real disposable income per capita has surged from 11,753 in 1960 to nearly 37,684 in August 2014. Moreover, approximately 45% of people in the U.S. expect their finances to improve in the next 6 months which would further increase consumer spending.
Improved financial conditions will not only increase the demand for durable goods in the United States but would also enhance the U.S. credit consumer's ability to pay for their purchases. This will allow Conn's to reduce its bad debt expense and strengthen its cash position. In my opinion, investors do not need to worry about the short-term downfall and should instead focus on the bright industry prospects that make Conn's an investment worth considering.
In my opinion, Conn's is an attractive investment opportunity for the long term. The industry prospects are quite attractive, and since the company is a market leader, it can successfully cater to the rising demand for its products in the coming years. The improved financial condition of U.S. consumers will increase their ability to pay off the debts thus reducing the bad debt expense of the company. Moreover, a majority of analysts hold a buy rating on the stock suggesting that they are also optimistic about its future. Based on my analysis, I give the stock a buy recommendation.
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The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.